Carney signals scrapping of forward guidance target
Mark Carney, Bank of England governor, has signaled that his flagship policy of linking interest rates to the rate of unemployment will be buried less than six months after its birth, saying the British economy is "in a different place" to that last summer.
Mr Carney flagged the policy U-turn at the World Economic Forum in Davos, letting the news emerge in a series of TV interviews in which he said that unemployment alone would no longer guide policy.
Although his big idea for monetary policy bit the dust, Mr Carney said the BoE had had no plans to raise interest rates "immediately". He will outline his views fully in a speech on Friday.
(Read more: Should the Bank ofEngland abandon forward guidance?)
Speaking to BBC Newsnight in response to the news this week that unemployment had fallen to 7.1 percent, almost to the point the BoE said it would consider a rate rise, Mr Carney indicated the bank has decided not to revise its 7 percent unemployment threshold.
Asked whether the BoE was about to decrease the 7 percent threshold to a lower figure, Mr Carney said he was against "unnecessarily focusing on one indicator" in future.
"There are a broad range of things we could do," he said, making it clear the Monetary Policy Committee had not taken a final decision yet. "We're trying to get across is that its all about overall conditions in the labor market…We wouldn't want to detract from that focus by unnecessarily focusing on one indicator," he added.
The BoE followed the Federal Reserve in announcing forward guidance last August in a bid to make monetary policy "more effective". It said it would not consider a rate rise in the U.K. at least until unemployment fell to 7 percent so long as inflation remained under control.
While it expected to keep interest rates at their historic low of 0.5 percent for three years under this guidance, the unemployment rate probably fell to the 7 percent threshold at the end of 2013.
Mr Carney made it clear in the interview that there was "no immediate need to increase interest rates" but said the economy was now "in a different place" to the time he introduced guidance. Then, he said, the concern was that the U.K. economy was stagnating and might contract again; now the concern is that rapid growth might need action by the BoE to make it more sustainable.
Commenting on the huge errors in the bank's forecasts, Mr Carney said: "If our forecast is going to be wrong, it's better to be wrong in that direction".
He committed the BoE to undertaking a consideration of whether a rate rise was needed in the new forecasts the BoE would publish in February.
Although ditching his flagship policy so soon after his arrival is embarrassing for the governor, he can expect to receive support from George Osborne in Davos on Friday. The chancellor's aides have let it be know he is relaxed about interest rates rising earlier than people previously thought.
—By Chris Giles, Financial Times